An investor would like to purchase a new apartment property that costs $4 million with an initial year NOI of $380,000, and an expected growth rate of 3% per year (in income and value). The building and improvements represent 80% of value and will be depreciated over (1 27.5 per year). Assume a 36% tax bracket for all income and capital gains taxes. The investor faces the decision of whether to use 70% or 80% financing. The 70% loan can be obtained at 10% interest for 25 years. The 80% loan can be obtained at 11% interest for 25 years.

Develop a 10-year pro forma.

(a) Use the pro forma to determine the before-tax IRR (BTIRR) and after-tax IRR (ATIRR) for each level of financing (assume monthly mortgage amortization).

(b) What is the break-even interest rate (BEIR) for this project?

(c) What is the marginal cost of the 80% loan? What does this mean?

(d) Does each loan offer favorable financial leverage? Which would you recommend?

Use Excel please.